We hate to be the killjoy, but if you’ve heard about the idea of a 50-year mortgage, start right now by taking a deep breath.
There are many, many questions about the idea and problems that need to be overcome. And for many would-be borrowers the idea makes no sense.
President Trump over the weekend floated the idea after Bill Pulte, the head of the Federal Housing Finance Agency, tossed the idea at him on Saturday.
The proposal would make available a loan that could be paid off in 50 years. Presumably the longer term might make sense if it meant lower monthly payments of principal and interest.
But that assumes you can get a loan with a rate similar to that of a 30-year fixed-rate loan, currently about 6.34%. (The traditional 30-year loan was first established in 1934.)
So let’s say you’re buying a home for $365,000 with a 15% ($54,750) down payment.
On a 30-year loan, that would mean a monthly principal-and-interest payment of $1,908.25. On a 50-year loan, that would translate into a payment of $1,688.46, a savings of about 11.5%.
Getting a rate close to what the market is for 30-year mortgages is what President Trump meant during a Fox News program on Monday. “All it means is you pay less per month,” Trump said.
Sounds great — but here’s the “but.” And it’s a big one.
Mortgage loans are sold to investors in what’s called the secondary market. That replenishes a lender’s cash to make more loans. By far, the biggest buyers of mortgages are Fannie Mae, set up in the 1930s, and Freddie Mac (FMCC), set up in 1970.
The secondary market would demand a higher rate for a 50-year-loan, according to Michael Highsmith, provost and executive vice president of Mississippi College in Clinton, Miss. Highsmith is a former real estate finance professor at Mississippi State University.
Why a higher rate? Because the term of the loan would be so much greater and the risk would be higher. How much higher would the rate have to be for investors?
How much more? At least a full percentage point, Highsmith said. It might even be 1.5 percentage points. And using a rate of 7.34% turns the payment on a 50-year loan into about $1,948 a month.
So much for the lower payment.
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Here are the other problems Highsmith sees:
Caveats for the homebuyer
You pay. And pay. And pay. Paying for 50 years means it takes much longer to build equity in your home. For many homeowners paying down a mortgage is like building savings. With a 50-year loan, the loan balance at 7.34% would still be about $245,000 after 30 years. On a 30-year loan, you’d own the property free and clear.
Mortgage insurance. You would be paying mortgage insurance for most of the time, Highsmith says. Private mortgage insurance, paid monthly, is required on what is called conventional loans with a loan-to-value ratio of greater than 80%. On our 50-year-loan, it would take 13 years to get the loan-to-value ratio to less than 80%. On a 30-year loan, the period would be 4.5 years.
(If you finance a mortgage with a loan insured by the Federal Housing Administration AND your down payment of 10% of the price or less, the mortgage-insurance payment is due for as long as you have the loan.)
You’ll pay a lot more in interest. Here’s how the numbers work on our example of the $365,000 home purchase and the $310,250 mortgage. On a 30-year you’ll pay $383,996 in interest over the life of the loan. Cost to own the property free and clear: $694,246. On a 50-year loan, the interest payments nearly double to a total of $716,741. Meaning, you will theoretically spend $1.026 million to own the house free and clear.
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Caveats for the lender
Length adds to risk. The risk of default rises as the loan runs longer. That’s why a 15-year mortgage now might come with a 5.8% rate, while a 30-year mortgage costs 6.34%.
Property values can decline. The property value of the home financed for 50 years can decline markedly over the loan’s life, Highsmith says. Some potential reasons? A local economy can tank; the owner may not upgrade the property to support its value; or the house might be in a neighborhood or community that deteriorates.
Prepayment risk. The perfect mortgage for a lender is one that is totally paid off at the beginning rate. Most families move every seven to 10 years, and they typically pay off their mortgages when they sell their homes and use the proceeds to finance their next homes. Or if rates fall they refinance to reduce their payments. That’s great for the borrowers, not so good for the lenders.
Related: Redfin sends strong message on mortgage rates
Will the 50-year mortgage ever take hold?
We’ve noted some of the issues. We must also note that a 50-year loan proposal would require congressional approval, thanks to the 2010 Dodd-Frank Act. The act made comprehensive reforms to the financial industry after the 2007-2009 financial crisis.
Under the act a 50-year mortgage does not currently meet the definition of a qualified or conforming mortgage. Under rules set by the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac:
- Mortgage size is limited.
- Term is a maximum of 30 years.
- Buyers must have decent credit scores.
- Homebuyers must meet debt-to-income standards.
- Down payments are required.
So, Fannie Mae and Freddie Mac couldn’t buy the 50-year loans.
This might be a case of an idea made public before it had been properly studied. In fact, Politico reported that Pulte threw the idea at Trump at an event in Florida and Trump liked it. But neither man seemed to understand the idea’s complexities.
Pulte and the FHFA are also toying with a portable mortgage that you could move from property to property, but that has its own complexities.
Finally, you can get a 40-year mortgage, but lenders don’t like them much, according to Bankrate.com, and there isn’t much demand from consumers either.
Related: White House proposes massive, money-saving mortgage change
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